Hopes for an indulgent Budget next Wednesday have all but disappeared with the publication of the Government's White Paper on Receipts and Expenditure for 2008. For the White Paper's estimates for tax revenues this year indicate that tax receipts drifted off course remarkably during November. In October, the Government anticipated that it would collect €925 million less in taxes than it had expected at budget time. But now, barely a month later, the projected tax revenue shortfall has escalated to €1,750 million.
The stalling of activity in the housing sector is, in large part, responsible for the scale of the tax shortfall. Revenues from stamp duties this year are now forecast to fall short of budgetary expectations by €730 million in 2007. The size of the tax shortfall, and the speed with which it has widened, throws a spanner into the budgetary works for next year.
It indicates that the economy, and particularly its construction-related components, is losing momentum. The expectation that economic growth will decelerate in the year ahead is supported by the White Paper's projection that tax revenues will advance by just 3 per cent next year, at unchanged tax rates.
Herein lies the problem for taxpayers. The Tánaiste and Minister for Finance, Brian Cowen, has already announced that he intends to raise day-to-day government spending by 8 per cent next year. He has also stated that public capital spending is to be increased by 12.5 per cent in 2008 in order to hasten the implementation of the National Development Plan.
With overall public spending already set to rise rapidly and with tax revenues now expected to exhibit slow growth over the year ahead, there will be little cash left over to fund reliefs for the taxpayer. The tax promises contained in the programme for government now take on the appearance of a midsummer mirage. It will be some considerable time yet before those tax pledges can be honoured.
But as economic growth weakens and as the prices of basic commodities such as food and heating have risen steeply in recent months, tax reductions should not be at the top of the policy agenda.
It is more important in the current circumstances in which the economy finds itself that those who have least receive most from next Wednesday's Budget. Thus, given the limited resources available, Mr Cowen should favour increases in basic social welfare payments over reductions in income taxes when he rises to deliver his Budget next week.
And when he does so, Mr Cowen's Budget will be analysed not just on the financial adjustments he makes in the post-Celtic Tiger era for the economy. In prevailing political circumstances, he will be judged for the first time on his policy priorities in less good times and his personal and political vision for Ireland in the future.